Discounting Candy To Account For Diminishing Marginal Utility

Mar 09, 2016

Another example that illustrates how the intersection of perishability and diminishing marginal utility determines discounting.

In the photograph above you see that the first box of candy costs $1.67. The second costs less, just $1.33. The third costs less still, just $1.00 – an aggressive discount of about 40% off the regular retail price.

Why the discount? Because, as discussed in other examples, candy offers diminishing marginal utility – the more you consume, the less you enjoy it. Very few people would buy three boxes at the full price, but the discount on the second and third boxes makes a larger purchase much more likely.

What about perishability? This candy is boxed, and not particularly perishable. Items that are not perishable generally have smaller, less aggressive discounts so that customers don't stockpile them, cheating the retailer of full priced sales.

Candy is perishable in one important sense though. It won't decline in quality as quickly as fresh popcorn, but candy does tend to get eaten. The people that buy Junior Mints are generally going to have a hard time ignoring them when they are sitting in their desk. The intention might be to save them and eat them gradually over a period of weeks, but they are likely to get eaten much faster.

Most importantly the retailer is trying to make the most of a perishable opportunity. They have the customer in the store and looking at candy. They have no idea if or when that customer will be back, so they want to take full advantage of this, the only guaranteed opportunity, to sell them as much as they can. And they'll offer some discounts to help.

Too often florists overlook this. The retailer above understands that the product offers diminishing marginal utility and, recognizing that the candy shopper places a lower value on the second box, prices accordingly.

The customer that calls looking for a dozen roses is similar. They might be interested in two dozen, but they don't see that second dozen as being as valuable as the first. To get that extra profit florists need to consider discounting, bringing their prices closer in line with the value customers assign to their product.

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